Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Monday, August 17, 2009

WE AGREE TO DISAGREE

Two competent and ethical tax professionals, one enrolled and one “unenrolled”, can disagree and still have a civil and creative discussion on a tax topic with mutual respect and consideration. Case in point –

I wrote a “think piece” on registration and licensure of tax preparers for the Viewpoint column of current issue of the National Association of Tax Professionals quarterly TAXPRO JOURNAL, adapted from posts on the subject at TWTP from earlier this summer.

Yesterday my editor forwarded an email she received from a tax pro and popular CPE instructor on the piece to me:

“Dear Cindy -

I'd like to express my disagreement with the recent Viewpoint by Robert D. Flach, 'License and Registration, Please' (Summer 2009 TaxPro Quarterly).

Thirty-eight years of experience does NOT guarantee competence, therefore I disagree with grandfathering in non-Circular 230 professionals if we have some type of national tax professional registration. Competence can only be measured by a test, and CPAs and EAs have already passed such a test. Non-enrolled individuals should also have to pass a test based on the types of returns for which they would like to be licensed to prepare. A competent practitioner would have no problem passing such a test, even with only 3 or 4 years experience. What's the problem? An incompetent preparer should not be preparing taxes. Period.

As an Ethics CPE instructor myself, I also disagree with Mr. Flach's take on an annual ethics requirement. I don't kid myself into believing that my ethics classes are going to change a 38 year experienced but unethical preparer into an ethical preparer. That is not the purpose of the ethics class. The purpose is to keep the ethical preparer from sliding down the slippery slope. Sometimes going to church on Sunday actually keeps a husband from cheating on his wife the following week, or the wife from killing her husband. The temptations are always there, but how strong is the resolve if it hasn't been fed recently? Just because it was fed 38 years ago doesn't mean it couldn't use another meal now.

Sincerely,

Kevin C. Huston, EA”

I replied:

Kevin -

Cindy Van Beckum of NATP has forwarded your email to me.

Thank you for sharing your opinion on this important issue.

(1) I sincerely do believe that 38 years of continued unblemished experience does indeed guarantee a degree of competence. In my case if I didn’t know what I was doing, and did not keep current, I could not stay in business at my current level this long. I firmly believe that proof of a commitment to annual continuing education is actually more of a test of competence and being current than a basic initial proficiency exam.

(2) If national registration and licensure of all tax preparers is to become a reality it will require the cooperation of all tax preparers. Forcing a person who has been in business for many years to take a test to be able to continue to make a living in his/her chosen profession does not encourage cooperation.

(3) As I point out in my editorial, it seems to me that it would be literally impossible for the IRS to properly administer a test to the close to 1 Million current tax professionals within a 6 month period.

You mention that EAs and CPAs have already passed a test. It is very true that EAs have passed an extensive and difficult test in tax preparation and representation knowledge. However CPAs have only passed a test, although also extensive and difficult, in accounting and auditing principles and practices. Passing the CPA Exam does not guarantee that a person is competent in 1040 preparation.

Regarding ethics classes, I repeat that if I ain’t honest to begin with listening to 2 hours at each and every CPE offering each and every year ain’t going to make me “see the light”. I am well aware of the punishments for unethical tax preparation. I doubt I would be around for 38 years if I encouraged and produced fraudulent 1040s.

I do believe that some periodical update on ethical issues, including preparer requirements and penalties, is a good idea. I have suggested 1 hour every other year. My main complaint is that for just about every 8 hours of CPE I pay for I get only 6 hours of actual tax knowledge.

I certainly do not wish that any new “Licensed Tax Practitioner” designation take anything away from the reputation or qualifications or credentials of the Enrolled Agent. I would not permit LTPs to “practice before the IRS”, other than currently unenrolled agents are already allowed so to do. I would continue to limit “practice” to EAs, CPAs and attorneys.

My final recommendations on licensure and registration, which have evolved a bit since writing my editorial for NATP, appear in my post “Dear IRS”.

RDF

Kevin responded:

“Robert -

I am not directing the 38 years of experience comment at YOU personally, but twelve or thirteen years ago, I purchased a tax practice from a practitioner (dying of cancer) who had been doing taxes for well over 40 years on his kitchen table. He was still deducting sales tax in the 1990s, and the IRS apparently never audited any of his clients, so he (and more importantly his clients) assumed that the returns were correct. He also deducted a flat $5 a day on the tax returns of his many blind vendors 'who can't see whether someone handed them a $20 or a $1 bill) because he thought 'it was proper, they've already been dealt a blow, why not give them a few breaks'. There were also other glaring errors or misstatements that a competent tax pro would have noticed immediately. His 40 years experience did not translate into competence at all. His 40 years of experience without repercussion only steeled him in his abilities as a great tax professional. Some of his clients stayed on with me, and many did not because they felt that 'I didn't know taxes', because the IRS had 'allowed' those deductions for so many years, they must have been correct. God bless his soul, he passed away that year after handing over his clients, for whom he truly cared.

You are no doubt a conscientious professional. You may have even attended some of the tax update classes I've taught in your area. But there are many out there who don't share our passion to help our clients while at the same time upholding the tax law. Some of those people also belong to the same national organizations that we do. Perhaps they sleep through the ethics and other sections of the class and, to be fair, perhaps they do listen to one of the presentations every other year to see if there are any new wrinkles. But a CPE certificate still doesn't show you learned anything. If each class had a test at the end of every hour, then we'd know if the important messages were conveyed or not. Now you've earned your CPE. Testing.

I don't see it as a hindrance at all for someone like you to be able to pass a test which I believe will be equivalent to the test given at the completion of the H&R Block Basic Tax Course (or similar first year preparer course for 1040 returns). And you already get annual CPE. Come on, you're whining for nothing! Admit it, maybe you just don't want to pay the fee!

NATP and other organizations have a vested interest in seeing that their members pass (or are grandfathered in to) the licensing process. I disagree that 'it takes the cooperation of all preparers'. It becomes a responsibility of all preparers.

As for the impossibility of the IRS doing anything within a short period of time, you'll get no argument out of me. In my opinion, all of the major stakeholders would be granted authority to test (H&R Block and the other chains, and the national tax and accounting organizations). Prometric has already computerized the SEE exam for Enrolled Agents. Within two or three years they could computerize a basic tax prep test. In other words, the best way for the IRS to do it is to not have the IRS do it at all. Farm it out. It won't happen in 6 months, I agree.

As for the oversight, that WOULD take beefing up OPR.

You obviously missed my point about the ethics CPE. It isn't for the dishonest. It's to keep the honest honest. Just like the lock on your front door isn't going to keep out the thief. But it will keep your nosy neighbor from seeing what brand of deodorant you use while you are out in the back yard. Your neighbor of 38 years doesn't want to steal from you, he is just curious as to why your wife smells so nice. The lock keeps him from doing something he will regret later. It's a reminder not to go where he shouldn't.

You are obviously offended by having to take ethics. Well, let me let you in on a secret: right now you don't have to unless you're a Circular 230 professional. But for some reason even Circular 230 professionals need to be reminded about EITC due diligence, preparer fraud, and those things that can get them disbarred or censured. We don't want the 'good guys' to lose their ability to practice, do we?

Maybe the ethics classes you have attended are boring. I hear that often. You might want to attend one of mine. We play a Jeopardy style gameshow that's as educational as it is fun. I'm presenting it this Fall for the North Carolina Society of Enrolled Agents, the Ohio Society of Enrolled Agents and the Illinois Chapter of NATP. I've already presented it to the California Society of Enrolled Agents and the New York Society of Enrolled Agents within the last year. Next year, so far the California Society of Enrolled Agents (for a reprise) and the Michigan Chapter of NATP have booked me. The participants always say things like 'best ethics EVER' or 'wow, I thought I knew that, but I learned so much!' I'll send you links to the various state sites if you're interested. I'll even buy you a beer after class and we can share a laugh. Iced tea if you don't drink alcohol. Seriously.

Similarly, I teach a BASIS class to long-term practitioners who also say they thought they knew all that, but still learned something useful.

So the purpose of me responding is not to convince you out of your beliefs (I don't think I'm that persuasive), but to point out that there are many out there like me that have just as strongly held beliefs otherwise. That is what a good discussion needs, isn't it?

Kevin”

And I returned the volley:

Kevin -

A good story about the 40-year veteran. I thought I had heard everything – but the $5.00 per day theft loss for the blind is a new one for me!

You mention you bought out the practice 12 or 13 years ago. Things were somewhat different during that preparer’s tenure – more FUs got past the IRS and preparer penalties were not an issue. I doubt if he would last as long today. If he was a kitchen table preparer I would not think he had lots of clients, and I expect that they were of lower income variety and not potential audit material.

Granted the best way to judge competence and being current would be an annual, or semi-annual, exam of all preparers. But this is obviously impractical and overly excessive.

And it is true that one could sleep through or find some other way of “cheating” CPE classes. I like how the IRS, and I believe also NATP, uses a badge scanner to record attendance at classes. However this process is flawed in that it only scans when one enters the class and not when one leaves. This procedure should be modified so that a person must scan when entering and leaving in order to get full credit.

But passing an exam is also not always a true measure of ability. Some individuals freeze up under the pressure of tests, while others can memorize facts for a short period and forget them the day after the test. And with so many people to test who is to say who is actually taking the test.

I still say that it would be literally impossible to properly administer a test for 1 Million + preparers (I include CPAs and attorneys who want to prepare 1040s in this number as explained in my proposal).

I do agree that it would perhaps be best if the IRS “outsourced” any initial proficiency test. While I expect that Henry and Richard and the various tax preparer membership organizations would jump on the bandwagon to offer exam review classes, I would not allow them to actually administer the test. This should be done either by the IRS itself or an “impartial” outside firm. I certainly would not trust anything administered by Henry and Richard.

A talented instructor, as I expect you are, can make even the driest subject interesting. To me it is still a waste of my time considering the current situation where almost every single CPE event has 2 hours of the topic included. (When I complained to the NJ-NATP about this waste of time I was told that attendance would drop off if ethics were not offered). I am not offended by an ethics requirement – what offends me is that even though I am not currently required to sit through 2 hours of ethics per year I am forced to pay for 4 to 6 hours of the topic each year.

I don’t believe that ethics classes are meant to keep an honest person honest. One’s degree of honesty is not determined or maintained by listening to even the best speaker. We are not talking about alcoholics or drug addicts who need constant reinforcement and support. If I really want to see what makes my neighbor’s wife smell so good your telling me that this is not “kosher” will not stop me. What stops me, other than personally integrity, is the prospect of going to jail for breaking and entering and stalking. I would compare the locked door more to practitioner penalties and existing legal sanctions rather than a lecture.

Now I would attend a class on BASIS.

RDF

Kevin’s final response:

“Robert -

An idea I had last night was to quit calling the class 'ethics' all together. It really is about safeguarding your practice and income source. Staying away from the things that cause penalties and sanctions. Knowing where to find the rules when you're not sure. How to develop (and more importantly implement) a privacy policy and a disclosure/nondisclosure policy. Why an engagement letter can help both you and your client. So we could call the 2 hours 'Safeguarding Your Practice' or 'Best Practices For Your Practice' or anything like that. I believe that people do want to make sure they stay out of trouble, and the government is always changing the rules (last year's required disclosure verbiage, for example).

Thanks for the thoughts.

Kevin”

Of course I had the last word:

Kevin -

Now that sounds like something I might sit through! Good idea. But only once during a year.

VITA volunteers have to take tests every year--it's not perfect, and the test could certainly be improved, but it's not that big of a deal. Why don't you try the VITA test yourself--it's available on-line.

I bet you could pass it without difficulty. It is open book, and I'd recommend that you get a copy of Pub 4012, the VITA volunteer reference book, on-line. It's not designed to determine whether you've memorized every detail of tax law, but whether you know when and where to look things up in that manual. (There is usually a question or two that will require you to look something up in the Pub 4012, i.e., a question of the form, in what tab of Pub 4012 will you find the rules about XXX.) But other than that, I bet you would have no trouble with the exam just from your current knowledge base.

As I said, it's not a perfect exam (no exam is) and there's certainly plenty of room for improvement, but it does at least screen out many people who should not be doing returns, and it provides all of us an incentive to study up on the new tax law each year.

Although preparers are allowed to use professional return prep software when they take the exam, you'll be happy to know that I don't. I actually enjoy the challenge of taking the exam without the software, and I take it even before the software is available.

Personally, I'd much rather take a test each and every year (which I can prepare for in a flexible way by self-studying) rather than sit through a lot of classes, entertaining or otherwise.

Yes, obviously there would have to be more test security because the incentives for dishonesty would be greater for paid preparers than for volunteers, but I agree that the IRS can outsource the testing--there are private sector firms that already give reasonably secure tests for a variety of certification purposes.

If I need to send one of our clients to a tax pro, because his situation is too complicated for VITA, I'd much rather know that he has passed a current year certification exam than just find out that he had scanned in his bar-coded ID card to prove "attendance" at CPE.

(1) Making all tax preparers take an annual, or even semi-annual (if re-registration is every two years) proficiency test to maintain their “license” is ridiculous and excessive. No other similar federal financial “credential” requires annual testing.

(2) What good is an open book, or “open software”, test as proof of competence? All is proves is that one knows where to look in the book. I agree that a tax preparer does not have to memorize the Tax Code to be competent, and part of one’s competency is knowing where to look for information (and we all rely heavily on workbooks like QUICKFINDER HANDBOOK during the season) - but if the test is going to be open book why bother. If EAs do not have an open book test for the enrollment exam then neither should LTPs.

(3) Just because I have the knowledge, training and experience to pass a proficiency test does not mean that I should embrace with open arms the financial and other inconveniences of having to study for and take one. After 38 years of continued unblemished practice I do not intend to “start from scratch” and prove that I know what I have been doing for almost 4 decades.

(4) I still think that it would be literally impossible to properly register and test over 1 Million tax preparers (I include CPAs and attorneys who want to prepare 1040s) in the period of May 1 through November 15 (the only true opportunity to properly conduct registration and licensure) of the first year such legislation takes place. Even if the test is administered by an outside contractor the IRS OPR still has to process the results as part of the licensure process.

(5) If registration and licensure of all tax preparers is to be successful it will require the support and cooperation of all tax professionals. Excessive testing requirements and invasive background checks do not inspire cooperation. I will gladly support and cooperate with the process as long as there is a “grandfather” procedure and all individuals who want to prepare 1040s for a fee (CPAs and attorneys included) are included in the testing (unless grandfathered) and CPE requirements.

Before contacting me with questions about how a blog post relates to your specific situation, please be aware that I do not give free tax advice to non-clients by e-mail, comment response, or phone. So don't waste your time and mine.